Ensure MFIs don't lend above 24 %, govt tells public sector banks

To stop micro-finance institutions (MFIs) from charging usurious rates, the finance ministry has asked state-owned banks to ensure that these institutions do not charge a loan rate of above 24 per cent.

Since microfinanciers take loans from banks and lend it to customers at rates as high as 36 per cent, the government is now insisting that public sector lenders ask MFIs to cap their lending rates in the range of 20-24 per cent as a precondition to access bank finance.

“The finance ministry directive says the lending rate charged by the micro-finance institutions should be about 24 per cent. So, it can be 20 per cent, 22 per cent or 24 per cent,” Central Bank of India CMD S Sridhar said.

Microfinance institutions usually provide financial services in un-banked areas, lending mainly to rural customers.

While the banks charge interest rates in the range of 9-14 per cent on loans given to MFIs, some MFIs in turn charge as much as 36 per cent from their clients.

“What the finance ministry is saying is that ensure that whenever you lend (to MFIs), the loan rate (charged by them in turn) are not usurious,” Sridhar added.

Under the current norms, banks need to give loans to farmers and small-scale industries to the extent of 40 per cent of their loan book, which comes under the category of priority sector lending.

When they fall short of the target, banks give loans to MFIs as they are also considered part of priority sector loans. There are about 800 registered MFIs in India. SKS Microfinance Ltd, the largest micro financier in the country, disbursed loans of over Rs 14,000 crore till March to nearly seven million borrowers.